Reviewing Life Insurance

CWA Network Blog 2018 - Advisor Marketing _ Reviewing Life Insurance

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Life insurance used to be one of those things that could be looked at fairly simply: It was either term life or whole life, and the premiums and death benefits were set for the duration of the policy. Even the cash value portion of a whole life policy was pretty straightforward.


Today, it’s not as simple. While the new twists on those traditional products have created more options for consumers and advisors alike when crafting a financial plan, they also need to be monitored more closely. In fact, some should be reviewed annually.

Life insurance should be viewed as part of a client’s financial assets. That is, it has a monetary value and can play an important role in helping people reach their objectives, which are as varied and numerous as people. Advisors probably already know that one of the benefits of newer life insurance policies is that they often aren’t as expensive as traditional whole life products.

I’m talking generally about universal life, variable life and the like.

But they aren’t all structured the same. For starters, some come with guaranteed death benefits and others don’t. Some come with a cash value whose earnings are derived from interest paid while others earnings are based on market returns. There also can be a big difference between a projection originally made of the policy’s future value and today’s actual value.

For example, say a policy was purchased 20 or so years ago, and the buyer was told that the cash value of the policy was projected to earn annual interest of 6 percent. At the time, it probably looked like a good idea to the buyer. The problem, of course, is that interest rates fluctuate and are impossible to predict. And in reality, it’s been a very long time since interest rates have been as high as 6 percent.

Reviewing Life Insurance - Blog Post Quote 1_ CWA Network

So when you do your review and look at the cash value today, you can see whether it tracked projections or is far behind what was assumed in the calculations. Basically, the cash value of the policy can only grow to the extent that its underlying investments do. So for the portion of the premium that goes toward the cash value, that amount will rise or fall based on the performance of whatever they are invested in. 

If a policy’s cash value hasn’t grown as projected and the death benefit isn’t guaranteed, the premiums would need to be increased to maintain the death benefit that was expected. And depending on how far off track the performance is, that required rise in premiums could be significant.

The danger of not reviewing a policy is the risk of the death benefit running out when you need it the most. When the time comes when you need it the most, your client will be really hard pressed to get more. Remember, too, that part of being a fiduciary is making sure that the original purpose for the policy still exists.

For instance, maybe it was purchased so the client could something to leave his or her spouse. Now, the client’s assets are great enough to minimize that as a concern. Or, maybe the policy was intended to cover federal estate taxes and now, with the exemption raised to $5.6 million per person, that’s no longer an issue. Or, maybe a new need has arisen that you haven’t addressed. For instance, a client’s business might have grown or taken on a new partner.

Another part of being a fiduciary is ensuring that your projections reflect a realistic risk tolerance for the client. In other words, clients need to understand how much risk will be shouldered by them vs. by the insurance company. Likewise, if the client approaches investing conservatively, subaccounts invested in growth stocks likely aren’t the proper choice even if the higher potential return is appealing at first. 

Additionally, don’t overlook the policy’s beneficiaries. Clients should make sure that the person listed as the primary beneficiary (or beneficiaries) remains accurate. Same goes for the back-up, or secondary, beneficiaries.  And, of course, any major life event — birth of a child, divorce, etc. — should spur an evaluation of a client’s life insurance needs.

Bottom line: Don’t expect life insurance to be a set-it-and-forget-it deal any more. With all the moving parts that come with newer policies, regular reviews are a key component of helping clients stay on track with their financial goals.

Want more? Check out this 12 minute video that delves deeply into why it’s vital to review your life insurance policy annually.

Written By Michael Palumbos

Michael Palumbos is a practicing wealth advisor and the co-founder of The Custom Wealth Advisor Network. He is dedicated to helping advisors and planners create a unique client experience that clients can’t help but to talk about and share with others.

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